2026 (3) TMI 258 - HC - Companies Law

Validation under Section 536(2): court may validate bona fide post-petition dispositions to enable completion and protect public interest.

Validation under Section 536(2) of the Companies Act was applied to post-petition assignments of project work where the court exercised equitable ... Validation of dispositions during winding up - bona fide transaction - court's discretion to save bona fide transactions during interregnum - word “void” - impact of the legislative direction in Section 536(2) of the Companies Act, 1956 - distinction between inadmissibility for want of stamp duty and voidness - insufficiency of stamp duty and lack of departmental approval - external departmental correspondence. Validation of dispositions under Section 536(2) of the Companies Act, 1956 - court's discretion to save bona fide transactions during interregnum - HELD THAT:- The Court in the case of Helbon Engineers Pvt. Ltd. vs. Ferral Anant Machinery Manufacturers Pvt. Ltd. [2024 (7) TMI 119 - BOMBAY HIGH COURT] relying upon the decision of the Hon’ble Supreme Court in the case of Pankaj Mehra and another vs. State of Maharashtra and others [2000 (2) TMI 718 - SUPREME COURT] applied settled principles that the word 'void' in Section 536(2) is subject to the qualifying words 'unless the court otherwise orders' and that the court has discretion to validate dispositions made during the interregnum if they are bona fide, fair, just and expedient in the interest of the company, its creditors and public interest. Having considered the factual matrix - the company's inability to fund and execute its share, the Board resolution and letter of 8th April 2019, the transfer of liabilities to the Applicant, the opening and operation of the escrow account, the advance and bank guarantee contingent on performance, and the Division Bench and Supreme Court treatment of the 2019 Agreements - the Court concluded that the 2019 Agreements were necessary and expedient, bona fide and for the overall benefit of the Company and the Joint Venture. Exercising the discretionary power to 'order otherwise', the Court validated the transactions consummated by the 2019 Agreements and rejected contrary contentions that the transactions ought to be treated as void under Section 536(2). [Paras 75, 76, 78, 87, 93] The 2019 Agreements are validated under the court's discretion and are not void under Section 536(2). Distinction between inadmissibility for want of stamp duty and voidness - Whether alleged insufficient stamping of the 2019 Agreements renders them void and incapable of being acted upon - HELD THAT: - Relying on the jurisprudence distinguishing admissibility from validity, the Court held that non-payment or insufficient payment of stamp duty renders an instrument inadmissible in evidence under the Stamp Act but does not ipso facto render it void. The defect is curable under the Stamp Act procedures; and because the Court was not being asked to impound or refuse admission of the agreements as evidence (the agreements had already been acted upon), the objection of insufficient stamping did not impugn the validity of the transactions being validated under Section 536(2). Accordingly the contention that the 2019 Agreements are void for insufficient stamping was rejected. [Paras 99, 100, 101, 102, 103] Insufficient stamping renders the instruments inadmissible (a curable defect) but does not make them void; the stamping objection is rejected for purposes of the validation. Irrevocable power of attorney irrevocable when creating an interest and cannot be unilaterally revoked during liquidation - HELD THAT: - The Court noted settled law that an irrevocable power of attorney which creates an interest in favour of the donee cannot be unilaterally revoked. Further, at the time of the purported revocation the Company was in liquidation and lacked the authority to revoke. The ex-director's newspaper notice purporting to cancel the irrevocable POA was therefore ineffective to defeat the rights created by the 2019 Agreements. [Paras 79, 80, 81, 83] The purported unilateral revocation of the Irrevocable Power of Attorney is ineffective; the POA remains valid as executed in 2019. External departmental correspondence does not vitiate internal JV arrangements acted upon - HELD THAT: - The Court accepted the Division Bench's treatment that correspondence from the government department is of little consequence to internal arrangements between JV constituents. It observed there were later letters acknowledging and acting upon the 2019 Agreements and, in any event, the government department lacked locus to disapprove internal JV arrangements. Neither the ex-director nor the department had brought effective proceedings to set aside or vary the Division Bench's findings. Accordingly the objections based on lack of VIDC approval or departmental rejections were rejected. [Paras 63, 64, 104, 105, 106] Departmental correspondence rejecting the 2019 Agreements does not vitiate the internal JV arrangements which were accepted, acted upon and subsequently upheld by higher courts; the objection is rejected. Final Conclusion: The Interim Application seeking declaration of validity of the 2019 Agreements is allowed under the court's discretionary power to validate bona fide transactions made during the interregnum; the Official Liquidator's Report insofar as it sought declarations against those transactions is rejected, and the request for a stay of the order is refused. Issues: Whether the transactions and agreements executed on 8th and 10th April 2019 (the '2019 Agreements') assigning the Jigaon Project work to the Applicant can be validated under Section 536(2) of the Companies Act, 1956 despite the pendency of winding up proceedings, and whether objections based on insufficiency of stamp duty and lack of departmental approval defeat such validation.Analysis: The statutory framework under consideration includes Section 536(2) of the Companies Act, 1956 which renders dispositions after commencement of winding up void unless the court orders otherwise, read with Section 441(2) and Section 449 of the Companies Act, 1956. Authorities establish that the word 'void' in Section 536(2) admits the court's discretion to validate post-presentation dispositions where transactions are bona fide, fair, just and reasonable and in the interest of the company, its creditors or public interest; complete nullity is not the inevitable consequence. The 2019 Agreements, executed in context of the Company's admitted financial incapacity and the need to prevent penalties and terminate risk to the Joint Venture and public works, transferred liabilities and payment mechanisms (including escrow operation) to the Applicant and were acted upon (site mobilisation advance, escrow deposits, completion progress and waiver of fines). Prior Division Bench and Supreme Court orders had recorded that prima facie the sub-contracting appeared for the overall benefit of the Joint Venture and Applicant, and those findings remain unchallenged. Objections based on insufficiency of stamp duty were considered in light of the law distinguishing inadmissibility (Stamp Act Sections 33, 35) from invalidity; non-stamping is a curable defect and does not, by itself, render a transaction incapable of validation where documents have been acted upon. Objections based on departmental approval were addressed on the footing that the correspondence had been considered by appellate courts and did not preclude the internal arrangements among JV constituents from being validated when acted upon and in the public interest. Applying the established discretionary test, the 2019 Agreements were found to have been entered into bona fide, to transfer liabilities and enable completion of the Jigaon Project, and to serve the interests of the Company, the Joint Venture and public interest, thereby satisfying the criteria for validation under Section 536(2).Conclusion: The Interim Application is allowed; the transaction of assigning the Jigaon Project work to the Applicant as evidenced by the 2019 Agreements is validated under Section 536(2) of the Companies Act, 1956. The Official Liquidator's Report prayers (a) to (g) are rejected. Prayer clauses (h) onwards are disposed of as not pressed.Ratio Decidendi: Where dispositions of a company's property occur after presentation of a winding up petition, the court may, in exercise of its equitable discretion under Section 536(2) of the Companies Act, 1956, validate such dispositions if they are bona fide, fair, just and reasonable and shown to be necessary or expedient in the interest of the company, its creditors or the public; insufficiency of stamp duty renders a document inadmissible but is a curable defect and does not by itself preclude validation.